(Part 2 of 3) Conversation with Cesar Purisima, Secretary of Finance, the Philippines, on – state funds ready to be tapped for investments – initiatives to make business easier – merging banks and privatising state-owned enterprises

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Emmanuel Daniel (ED): Cesar Purisima is the Secretary of the Department of Finance of the Philippines. He’s here to talk to us about the work that he’s got cut out for himself in terms of reducing the debt of the country and increasing its revenue capacity. Thank you very much for speaking to us today.

Give us a sense of the objectives that you’ve set for yourself on both sides of the balance sheet: collections and debt reduction.

Cesar Purisima (CP): Well, Emmanuel, before I answer that, let me give you an even bigger picture—the agenda of President Aquino—which is really to reduce poverty in the Philippines by accelerating economic growth rate. We’re one of the few countries that has continued to grow since 1998, even through the global economic crisis, albeit at very low levels. And that’s where the challenge lies.

We need to grow around 7% on a sustained basis for many years if we are to attain the objective of President Aquino of really reducing poverty in the Philippines. And he’s come up with a programme that some refer to as “Aquinomics” with four pillars. The first pillar is fiscal sustainability and macroeconomic stability. The second is reducing the infrastructure gap and allowing for businesses to be able to improve their competitiveness in the Philippines. The third is simplifying procedures and processes to ease doing business in the country. And finally, to continue investing in our people, which has really been our main source of competitiveness in the past.

Now, in my area of responsibility, which is on the fiscal part, our goal is to reduce the deficit to 2% of GDP by the end of 2013. And we believe we’re well on the way towards doing that. When we took over in June last year, the deficit was way beyond the programme already. In fact, most analysts were saying we were going to have 4.2% but we came in below what their projections were; in fact, even lower than the programme of the previous administration, which was 3.2% of GDP. We came in lower than that and our programme for this year is 3% of GDP. And again, we’re within that. And we did this in two ways—first, by implementing zero-based budgeting on the expense side, and second, by improving administrative efficiency in collecting taxes. On the tax side, the President has promised no new taxes until we reduce the holes in our system.

Based on our calculations for the first 12 months, we’ve improved collections close to $2 billion—?75 billion—and that’s really by close coordination of the two revenue agencies, by using public information to help us target tax evaders and smugglers. I believe, personally, that all transactions are mirrors. Market share data, data from other countries—you can manipulate this to arrive at expected taxes from industries or companies. And we’re building IT, training people and developing the processes so that this can be sustained.

On the expense side, in fact, I think we’ve overdone it except that the key, really, is reducing wastage and corruption. We believe that even with the same amount of expenditure, we’re able to give more benefit to the public.

I’ll give you a very simple example—a project, approved in the previous administration, ?18.7 billion worth involving the dredging of a lake. The President stopped it because the volume of mud dredged would be back in three years because the source of the siltation has not been addressed—which is the denudation of the watershed as well as the human settlement around the lake. So, the President said, “We’re just wasting $18.7 billion.” And again, from the low-interest rate environment from the debt swaps we did—and again, the improved confidence in the Philippine government—we were able to reduce interest expenses just in the first four months. That’s down ?23 billion, which is almost equal to the conditional cash transfer programme of the President in supporting the lowest quintile of our population. And that’s really at the heart of our strategy. It’s really not being a scrooge or anything; it’s being smart about the whole process: increasing revenue and deploying hard-earned revenue to make sure that it’s aligned to the programmes of the President.

We haven’t fully achieved the ideal situation because we’re investing in the bureaucracy. Remember, we just brought in ministers, but the bureaucracy is the same. So we have to invest in them, invest in technology, in the culture, in training … This takes time, but we’ve had results already. As a result, we’ve been upgraded four times, with Fitch putting us a notch below investment grade. Honestly, I think we should be probably closer to investment grade already.

ED: Today because of your capacity to pay and the fact that you’ve never defaulted.

CP: Many things—never defaulted, we’re a net creditor country, our foreign reserves of $71 billion and growing, is bigger than our foreign debt. Our debt to GDP, officially, is around 51%, but if you net off on the sinking funds that the law requires us to maintain, we’d be closer to 42%.

ED: Which then begs this question: Is the Philippines a slave to foreign debt in terms of its inability to build its own domestic capital market and to, in fact, facilitate FDIs to take up some of the slack?

CP: Well, actually, that’s very far from what’s happening. In fact, our borrowing programme this year is only 25% foreign, 75% local, and it’s been increasing ever since. There’s enough liquidity, actually, in the local capital markets to fund our deficit, except that I believe it’s prudent to maintain our investor base. You know, maintain investor relations; you never know when we will need them.

2. Reducing the infrastructure gap

ED: Your picture of the whole in terms of the big picture of the projects that you have in mind on the fiscal side begs a few questions.

You gave a snippet of your refocusing your investments on productive activities, such as the civil service and the work that needs to be done on that front. But as a politician, do you see the need to also be investing in some very visible productive assets that the population can get a sense that, “This government is taking us somewhere with the fiscal prudence and responsibilities”?

CP: Oh, definitely. I was just describing the first pillar, which is fiscal sustainability and macroeconomic stability. The second pillar, which is infrastructure—reducing the infrastructure gap—I think is what you’re referring to.

The President actually launched a PPP programme immediately after taking office, building on the experience of the Philippines in the past and learning from the mistakes then, with a focus now more on solicited projects so that there’s more transparency to the process. So, the projects that we launch will stand scrutiny, even beyond the term of President Aquino. We have identified ten projects. One is already up for tender. We’re a bit delayed because of the need for feasibility studies and we want to make sure that we do the right feasibility studies. So hopefully, we can launch about five this year and many more next year. The key is building this framework that would go for a sustainable process of PPP and we have a very ambitious plan—it cuts across the tourism infrastructure, agricultural infrastructure, mass transit, water, power—really to improve infrastructure across our country.

ED: One of the potential challenges you might have going forward is something which a number of countries face that actually get their public sector budgets in control and under very strong prudent management. And yet, the corporate sector then goes out and borrows externally because they, too, need to grow, and if the capital market, domestically, is not able to feed that. And in fact, in a number of developing situations—Iceland was a great example; New Zealand’s balance sheet looks this way; Australia looks a little bit like this in that the government has got its budgets in place, but the corporate borrowing—external borrowing—is on the high side, or well on the high side in the case of Iceland, for example.

The Philippines’ corporate sector is an ambitious part of your economy and if you’re going to get them to participate in your PPP programmes, they would need funding as well. And you haven’t fixed this—the capacity of the Philippines to attract foreign direct investment at this point, sufficient to fund some of the projects that you have in place. Do you have some checks in place that you do not get into a runaway situation on the corporate debt side?

CP: First, that’s certainly not the case in the Philippines. We don’t have that situation with a private sector over exposed to foreign borrowing. Secondly, we do have checks. The Central Bank of the Philippines has to approve all external borrowing. So, they monitor the outstanding amounts and the capacity of the entity to be able to pay those lenders. Third, there’s enough liquidity in the Philippine capital market and the Philippine banking system. My estimate: it’s about ?3 trillion just sitting there waiting to be tapped. In dollar terms that’s $80 billion roughly—that is sitting there, waiting to be tapped for more productive purposes. And in fact, in my role in building the capital markets, I’ve created the 25-year benchmark. I’ve made them more liquid—20-year benchmarks. We’re making them part of our regular offering. I heard that a major global bank is about to set up a Philippine-focused infrastructure fund in pesos. And certainly, we are confident that there’s enough liquidity to be able to fund the first projects in our pipeline.

The World Economic Forum survey has us at ten notches higher than where we were in 2009 and we’re working on it. That’s the third plank of President Aquino’s programme—really improving doing business in the Philippines; aligning forms and processes, making it easier to register business, using technology to do so.

We’re investing in that—on my part of the responsibility—we’re about to launch the National Single Window in the Bureau of Customs where people can get permits from 40 agencies online in a portal to do imports and exports. And once this up, we can connect this with the National Single Window of other countries. So, we’re investing in the incorporation of companies. The Land Bank of the Philippines, which has over 300 branches in the Philippines, has tied up with the Securities and Exchange Commission, which has only eight offices so that all the branches of that bank can accept requests for incorporation, again, making it easier to do business in the Philippines. Then, the 200 largest local government units have agreed to have the same forms, the same procedures. And these are all steps we’re taking to improve our environment in the Philippines.

ED: Give us an idea of the animal called the state-owned enterprise in the Philippines.

In a way, it’s somewhat different from state-owned enterprises in other countries, which are often one of the first assets that a government tries to rationalise in order to make sure that it’s able to fund itself and also provide infrastructure and services on a commercially-capable basis. But the Philippines has been somewhat slow in rationalising its state-owned enterprises; so what’s happening on that front?

CP: Well, I’m glad you asked the question. We just passed a Bill. The Government-Owned and Controlled Corporations Bill that allows us, now, to rationalise these corporations and classify them as to whether they are commercially ready and can be privatised, or whether they’re doing functions that should be in government where we can introduce performance measures, and rate their performance so that we can introduce meritocracy within these government corporations. In fact, we realised that this is an area that needed a lot of improvement, and that’s why we worked closely with Congress immediately, and this was one of the first few Bills, and it really empowers the executive department to restructure.

ED: Well, so, now that the Bill is in place, what are some of the priorities that you have on the use of that Bill?

CP: Well, first, to set up performance measures. In the past, they operated on their own. Their targets and goals were not aligned with national targets. So, that’s the first thing so that all arms of government are pointed in the right direction. Once that’s done, we measure their performance. Then, as we do that, we look at how efficient they are. We benchmark them against …

ED: Sure. But all of this means that you’re putting yourself on a very long road where you’re going to be just telling them how good or how bad they are without any real roadmap as to deciding which of the state-owned enterprises should still belong to the state, and which should be privatised, which should be loaded off on the stock market, and so on.

CP: That’s part of the process and that’s something that you cannot decide with a swing of a magic wand. You need to study the roles that these entities play and that process is ongoing. In fact, one of the things that we’re looking at right now is the merger of the Land Bank of the Philippines and the Development Bank of the Philippines. This is something that’s being studied so that they become more efficient in intermediating funds for the programmes of government.

We’re looking at an entity, in fact, there’s a proposal right now, for the privatisation of the Duty-Free Philippines Inc. It’s being reviewed. So, just like in the private sector, you need a process. You cannot just jump into conclusion on whether an entity should go left or right. You need to study it.

ED: But just listening to the way you’re describing it to me, it gives me the sense that you have no intention of giving anything away.

CP: Far from it. In fact, we have privatised companies in the past. I’ve pushed for the offering of sale of PNOC-EC, the exploration company, which is listed in the stock exchange. Petron, which is the national oil company, has been completely privatised. We’re looking at others that should be privatised. Process is very important.

ED: Are there rules about the privatisation in that? This would be a message to the foreign investor … And how can the foreign investor participate in some of this privatisation?

CP: Well, the commission has to be put in place. Now, as Secretary of Finance, as I’m doing the job, the law has created a commission, and we’re putting together that commission, and they will continue the job that we’ve started. But clearly, the Aquino Administration is committed to making sure that entities that are commercial and doing the function of private enterprises should not be in the hands of government. Two, those that are doing functions that are for government and regulatory in nature, should go back to government. Three, those that are missionary should be revisited and be reviewed to make sure that there is a focus—there is an objective—and that the results are measured.

ED: All this sounds exciting, but you were part of the previous administration.

CP: For a short time and I resigned.

ED: And you did not have enough time to set in place some of these … ?

CP: Because the previous administration did not have the right agenda. I resigned because we questioned 1) the mandate of the previous president; and 2) the culture of corruption. Most of my life was in the private sector and the only reason I came back is, 1) we have a president with the largest mandate ever of a Philippine president; and 2) runs on a platform of good governance; and 3) is walking his talk. And that’s why I’m here and that’s why I’m here to help him make that happen.

We’re in our 15th month in office and we’ve done a lot over those 15 months. We’ve changed the direction of the Philippines across the four pillars that I mentioned; the fourth pillar being investing in our people. We’re increasing that amount now to $1 billion, making sure that the children of the poorest of the poor go to school and are brought to health centres, so that when they grow up, they can become productive participants once the economy of the Philippines takes off because if we don’t do that—this is the fastest growing segment of our population—then they become a problem. So, we like to continue to make sure that they become an asset rather than a problem.

ED: And how do the Filipinos who work abroad today—and you’re one of the countries with the largest expatriate population—and the remittance income, how does that factor into your equation at the moment? Do you see that income sliding as a percentage of the total revenue in the years to come?

CP: Well, clearly, that’s a source of strength and it’s been proven to be very resilient. In 2008, they expected it to drop during the global crisis, but it didn’t. And this year, we expect to receive close to $20 billion from our overseas foreign workers. But in addition to that, we’ve grown a BPO industry that’s growing about 20% a year; that’s going up in the value chain; that’s No. 3 in the world already—in fact, No. 1 in many subcategories. We have a semiconductor industry, an electronics industry, that accounts for 60% of our exports. It’s fully-integrated with ASEAN. That’s now complete in terms of cluster when you consider it as part of ASEAN. We are fifth in mineralisation among the countries of the world. In fact, that’s another opportunity for us.

But the low-hanging opportunity that we’re really pursuing is tourism. We only have 3.5 million tourists and that’s why part of the infrastructure that we’re building is airports to improve access to our tourist spots. And we’re targeting North Asia as a primary market, we being the northernmost part of ASEAN, with a coastline longer than that of China, China is expected to have 100 million tourists in by 2015, and we hope to tap at least 5% of that.

3. Relations with ASEAN and China

ED: Secretary Purisima, you’ve been quoted recently as being very, very vocal about the promise of ASEAN and have been talking about ASEAN having to link more aggressively towards India. Has some of the things that you’ve been saying about the ASEAN domestic market, and India and so on, have to do with the relationship between the Philippines and China today and some of the difficulties inherent in that relationship?

CP: Well, first, ASEAN will be good for the ASEAN countries as evidenced by the 13 industries that are already integrated, including our electronics industry; that has made it much more sustainable. ASEAN integrated—we’ll have GDP of 1.7 trillion and a population of over 600 million. It’s a market that cannot be ignored. And given the historical background of Asia, which is going to be the most dynamic economic region in the world, ASEAN will play a key role as the hub for trade. That’s why we’re engaging China. We have the ASEAN-China Free Trade Initiative. We have ASEAN-India. We have ASEAN-Japan. We have an ASEAN-Australia/New Zealand. And I think that is the vision: to make sure that we play an important role in facilitating trade within Asia.

In fact, most of us in Asia, our future really relies on our ability to increase intra-Asia trade with Asia as the ultimate consumer rather than outside Asia as the ultimate consumer. And with increasing disposable incomes of the region, including tourism.

China is the fastest growing country of the world for the past 30 years. It will become the largest country in the world.

ED: And how is that relationship with the Philippines?

CP: It’s the fastest-growing component of our trade, and therefore, even in the private sector, you go to your biggest, fastest-growing customer, and pay a visit to tell your customer that, “Here I am. I’m willing to do business with you.”

ED: But your customer has been quite a troublesome customer, hasn’t he?

CP: Well, customers are as they say— always have a point, no? And in any relationship, a vibrant relationship at that, it has to be a continued dialogue. And all relationships, whether it be business or personal, will not be healthy without a constant dialogue.

ED: What are some of the trade relationships or the economic relationships with China that has to be straightened out over time, do you think?

CP: Well, we set for ourselves a goal of increasing our bilateral trade to $60 billion by the end of 2016. We set for ourselves a target of two million tourists between ourselves by the end of 2016. I hope we beat that—it’s not such a low number. We’re an archipelago. One of the key themes of ASEAN is connectivity, not just within ASEAN, but ASEAN and its neighbours, including China. That’s why they’re building railroads from China, through Vietnam, Thailand, all the way to Singapore. Then, roll-on roll-off port back up to China through the Philippines.

We look at ourselves as the northern gateway to ASEAN and the Pacific gateway to ASEAN. That’s why we’re building infrastructure. We believe that—we’re bullish about the Philippines and one can’t help that because, finally, things are alive. Imagine, no other country has grown consistently since 1998, I think, in ASEAN except the Philippines. Imagine, the past many years, we have political issues; now, we have a leader with a mandate.

And in fact, one of the best evidence of what he has done to use his mandate is the Open Sky policy. President Ramos tried it; Arroyo tried it; Estrada tried it. They failed. They didn’t have the political capital. Aquino was able to do it in his first year. He opened up the skies outside Metro Manila. So, that should allow any airline who wants to fly to the Philippines the right to fly in and we just need the airports. Air Asia has set up an airline. ANA is back. Tiger Airways is there. Jet Star and Jet Airways are there. That’s why we’re excited about our future.

ED: It used to be said about the Philippines that it’s actually run by about nine families or so, and it’s a very land-based economy, and the large families or the main families own so much of the land in the country. What has changed that has made your government able to push through some of these transformations through your very reckless legislation?

CP: All countries have histories, and you need to build and learn from your history and heritage. China used to have the Bamboo Curtain and the Bamboo Wall; they don’t have that now. And Deng Xiaoping opened up China to the world and look what happened. Every country has its own stage of development, and we believe that we found a leader who has the support of the people, who has the people at his heart, who is in alignment. And I think that’s the key.

The Filipinos, whatever they are—whether in journalism, or manual labour, or in skilled labour, they do well. In fact, when you compare a Filipino with a Singaporean, with a Malaysian, with an American, they can compare favourably. But the country—that’s difficult because somehow, we failed to invest in our infrastructure. We failed to solve our governance problems in the past. But I think we’re working on all those areas. We believe that we have the government that’s committed to sorting those out.